Week in FX Europe April 15-20

Euro bond auctions dominated this week’s proceedings. German product, with the ultra-low yields, is beginning to struggle to attract strong demand but is unlikely to have a strong effect on the EUR. Why? With the desirable Bunds, investors in this environment tend to prioritize safety over returns. Capital Markets main ‘squeeze’ has been Spain. After passing this week’s 2 and 10-year litmus test, Spain has now managed to place more than +50% of its likely issuance for the year. Does this rule out a Euro systemic funding crisis happening in the near term? The answer is ‘probably’, nevertheless, weak data and rising non-performing loans would indicate further easing bias from the ECB. However, despite the week ending on strong data surprises in the UK and Germany, a dovish bias cannot be supportive for the single currency.

Below are some other highlights of the week:

EUROPE

• EU: After China’s band widening, spiraling Spanish yields, and the EUR trading briefly sub-1.30, the week started with the WSJ reporting that Moody’s might cuts ratings on 114 European institutions.
• GBP: The Rightmove UK house price index gained +2.9%, m/m, in April, compared with a +1.6%, m/m, increase in March.
• GBP: UK inflation surprised higher at +3.5%, y/y, and above consensus (+3.4%). Core-CPI increased to +2.5% from +2.4%, y/y, in February. It’s not a surprise that the strength in the headline can be attributed to higher food prices. Core-inflation on a seasonally adjusted basis added +0.2%, m/m, following a similar increase in the previous month. This would suggest that underlying inflation momentum remains rather persistent, somewhat inconsistent with Governor King’s projections for a decrease.
• EUR: German ZEW (professional forecasters) surprised a tad stronger with the expectations component rising to 23.4 from 22.3. The current situation assessment rose to 40.7 from 37.6, also above consensus for 35.0. It’s worth noting that the ifo (sentiment of German businesses) is being seen as a more reliable leading indicator for the real economy.
• IMF: Boosted their economic growth forecast to +3.5% from 3.3% for this year.
• GBP: The BoE April minutes were less “dovish”, with 8-1 votes in favor of an unchanged policy. Mr. Miles dissented again, preferring to increase the size of the asset purchase program by a further +£25b. The surprise came from Posen not voting for more QE. Members acknowledged that GDP could decline in both Q1 and Q2 this year, but “underlying aggregate activity growth was likely, if anything, to have picked up since the second half of 2011.” The tone on inflation was slightly ‘hawkish’ with “risk that inflation would fall more slowly than assumed in the February Inflation Report projections”. If market perception of EU credit worsens can only be a sterling plus.
• GBP: UK’s claimant count increased by +3.6k last month. The February print was revised down from +7.2k to +4.5k. The three month unemployment rate beat market expectations and fell to +8.3%.
• SEK: Not a market surprise was the Riksbank leaving the repo rate unchanged at +1.50% this week. However, Deputy Governors Ekholm and Svensson both voted in favor of -50bp cut. The CBank’s statement was “relatively balanced”, managing between brighter prospects for exports vs. the fragile concerns with mainland Europe. “Monetary policy needs to remain expansionary to support the recovery,” but no further cuts were warranted at this stage. Inflation forecasts were left unchanged while 2012 GDP growth projection were revised lower to +0.4% from +0.7%, mostly on the back of the unexpectedly weak Q4.
• ESP: It’s no surprise to see Spanish house prices falling again by -7.2%, y/y, in Q1, worsening from -6.8% in Q4. The country’s bad loans ratio also increased to +8.16% from +7.91% in January. How long can 10’s trade below +6%?
• EU: German Bunds, with the ultra-low yields, is beginning to struggle to attract strong demand, however, investors in this environment tend to prioritize safety over returns. It’s Spain that everyone has been focusing on.
• ESP: The Spanish auction saw a bid-to-cover ratio of 2.4 on 10’s and 3.3 on 2’s and was viewed as a reasonable result. Year-to-date, Spain has now managed to place more than +50% of its likely issuance for the year. Does this rule out a Euro systemic funding crisis happening in the near term? The answers is probably, however, weak data and rising non-performing loans would probably indicate further easing bias from the ECB, which cannot be supportive for the single currency.
• ITL: Italian industrial orders were reported down -2.5%, m/m, in February following the -7.7% decline in January, pointing to a continued weak outlook for production.
• UK: There was a significant surprise in UK sales data Friday. Last month’s print came in at a very strong +1.8% gain, ex-food and energy, the headline revealed a firm +1.5% print. Bigger picture, if the BoE minutes this week were unable to convince you that QE is now likely for an extended pause, then sales print will help persuade the market that UK policy makers are very much in a “holding pattern” on QE. For the BoE, no further evidence of downside risk to growth and with risks to inflation now appearing, there is no need for them to pull a QE trigger just yet.
• GER: German business confidence has again unexpectedly increased for a sixth straight month, with companies encouraged by signs that the Euro-zone’s largest economy is rebounding from the bloc’s slowdown. The index rose to 109.9 as manufactures regarded economic outlook “significantly more positive.”
• FRF: First round of the French election commence on Sunday.
• G20, IMF and World Bank meet in Washington this weekend.

AMERICAS Week in FX

ASIA Week in FX

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